Health care law, medical device tax survive shutdown debate

With the debt ceiling stalemate now resolved, the Affordable Care Act and its tax on medical devices have both emerged virtually unscathed from the latest – but probably not the last – political effort to weaken the contentious health care overhaul.

Congressional Republicans’ attack on President Barack Obama’s legacy-defining legislation spawned a 16-day government shutdown and took the nation to the brink of a potential debt default before party leaders conceded defeat Wednesday. They finally agreed to raise the debt limit and reopen the federal government without securing any major concessions in the health law from Democrats.

The deal does require the Obama administration to verify the income of low- and middle-income Americans who get federal subsidies to help pay for health coverage on the new online insurance marketplaces. But similar requirements are already in the Affordable Care Act.

Republicans, as well as Democrats, who wanted to repeal or delay the Affordable Care Act’s 2.3 percent excise tax on medical devices were forced to drop that effort as the administration kept its vow not to negotiate any changes in the health law under threat of government shutdown or a debt default.

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But the fight to kill the tax is not over, said Mark Leahey, president and CEO of the Medical Device Manufacturers Association.

“More and more members of the Senate and House of Representatives are learning about the devastating impact the medical device tax has on innovation, jobs and patient care, and MDMA will continue to educate elected officials about this important issue until it is repealed once and for all,” Leahey said in a statement.

A widely cited industry report claimed 43,000 U.S. jobs would be lost because of the tax, many of them to countries like Singapore, Costa Rica and Ireland, where production costs are cheaper, according to Jeff Jonas, a health care portfolio manager with Gabelli Funds of Rye, N.Y.

“We’ve seen companies like Stryker and Medtronic and other large brand name companies announce pretty clear restructuring plans and job cuts, and a good part of that reason is to mitigate the impact of this device tax,” Jonas said.

House Speaker John Boehner echoed that sentiment on Sept. 30 after the House passed a spending bill that would have repealed the excise tax. Boehner said the bill “would eliminate permanently the medical device tax that is costing us tens of thousands of jobs that are being shipped overseas.”

But those claims are largely overblown, according to some experts, like Eugene Kiely, director of FactCheck.org, a nonpartisan, nonprofit government watchdog project of the Annenberg Public Policy Center at the University of Pennsylvania.

“We couldn’t even come up with tens of thousands of jobs that are being lost here in the United States, let alone being shipped overseas,” Kiely said.

Kiely reviewed 8,725 domestic and foreign job cuts by 12 large device makers and found most companies cited additional factors besides the tax for the reductions. He said the overseas investment and job growth by U.S. device makers is being fueled mainly by industry growth in “emerging markets” like China, Brazil, India and Russia.

Along with fees on health insurers and pharmaceutical companies, the device tax helps pay for the law’s expansion of Medicaid coverage and the financial assistance for people purchasing health coverage on the insurance marketplaces.

The device tax only applies to clinical medical devices like stents, catheters and defibrillators that are sold to U.S. health care providers. Devices manufactured abroad and in the U.S. are subject to the tax. Devices purchased directly by U.S. consumers like hearing aids, wheelchairs, thermometers and contact lenses are not subject to the tax.

Because of bipartisan opposition to the tax – due mainly to aggressive industry lobbying and the sprinkling of device makers across a wide swath of states – many believed the House and Senate would agree to jettison the tax as part of a grand deal to raise the debt limit.

But doing so would have created a $30 billion funding shortfall for the health law and open the door for other stakeholders to seek similar relief from its funding requirements.

In fact, a new coalition of business groups backed by the U.S. Chamber of Commerce has just launched a campaign to halt an annual fee on health insurers that begins next year under the health care law. The fee is expected to generate more than $100 billion over 10 years.

The medical device, insurance and pharmaceutical industries face new taxes and fees to help pay for the Affordable Care Act because they’ll see substantial new revenue when the law requires millions of uninsured Americans to start buying health insurance in 2014.

But Jonas said the device industry won’t see as much new revenue because seniors on Medicare provide most of the industry’s sales. Many of the newly insured under Obamacare will be younger, healthier people who won’t require medical devices. In addition, Jonas said hospitals are under increasing pressure to cut costs, and that’s driving down the price of medical devices.

Jonas estimates the tax could cut device makers’ U.S. profits by up to 5 percent, but he added that profit margins on clinical medical devices average about 30 percent.

Industry lobbying already had cut the device tax in half, from 4.6 percent to 2.3 percent. And because the excise tax can be deducted from a company’s income taxes, the true impact will be more like 1.4 percent instead of 2.3 percent, Jonas said.

A research and development tax credit of nearly 2 percent further eases device companies’ tax burden, he added.